Saudi Arabia is monitoring the impact of the US withdrawal from the Iran nuclear deal on oil supplies and is ready to offset any shortage but it will not act alone to fill the gap, an OPEC source familiar with the kingdom's oil thinking said.
On Tuesday, US President Donald Trump abandoned a nuclear deal with Iran and announced the "highest level" of sanctions against the OPEC member. The original agreement had lifted sanctions in exchange for Tehran limiting its nuclear programme.
Iran is the third-largest oil producer in the Organisation of the Petroleum Exporting Countries, after Saudi Arabia and Iraq.
"People shouldn’t take it for granted that Saudi Arabia will produce more oil single-handedly. We need to assess first the impact if there is any, in terms of disruption, in terms of a reduction of Iran's production," the OPEC source told Reuters on Wednesday.
"We have managed to put together this new alliance between OPEC and non-OPEC. Saudi Arabia will not in any way act independently of its partners."
Riyadh is working closely with the United Arab Emirates (UAE), which holds OPEC's presidency in 2018, and non-OPEC producer Russia for "coordination and market consultations," the OPEC source said.
He said any action would be taken in coordination with all OPEC and non-OPEC partners, if needed.
Kuwait's oil minister said on Wednesday his country would work with OPEC and non-OPEC producers to limit the impact of any possible oil disruption.
OPEC's oil supply-cutting deal with non-OPEC producers such as Russia has helped to clear a global oil supply glut and boost prices. The agreement is due to expire at the end of 2018.
OPEC officials from Saudi Arabia, the UAE and Russia along with a few other producers in the pact are due to meet in Saudi Arabia on May 22-23 as part of a monthly meeting for the Joint Technical Committee which monitors the oil market.
Saudi Arabia, the world's largest oil exporter, is concerned about any negative impact from the potential oil supply shortage for oil-consuming countries, the OPEC source said.
But Saudi Arabia has enough oil production capacity — currently 12 million barrels per day (bpd) — to maintain oil market stability, the OPEC source added.
Iran produces about 3.8 million bpd. Since the Iran nuclear deal went into effect, its exports have risen to about 2.5 million bpd, from less than 1 million bpd. A majority goes to Asia, with Europe receiving about 600,000 bpd.
Analysts now expect Iran's supplies to fall by between 200,000 bpd and 1 million bpd, depending on how many other countries fall in line with Washington.
Trump And Oil Prices
Oil market have rallied over the past weeks on expectations that US sanctions could limit Iranian oil exports. Brent crude was trading above $77 at a 3-1/2 year high on Wednesday, raising concerns that prices were going too high too fast.
Trump accused OPEC last month of "artificially" boosting oil prices in a message on Twitter, the first time he has mentioned OPEC on social media.
His tweet was seen by OPEC sources as a way to appease a domestic audience unhappy about a rise in gasoline prices.
A key US ally, Saudi Arabia welcomed Trump's decision to withdraw from the nuclear agreement.
Riyadh's comment that it would work with OPEC and non-OPEC to lessen the impact of oil shortages was a clear indication that it has been coordinating with Washington ahead of time, sources familiar with the matter said.
"You need to work with your partners in dealing with any potential effect on supply," the OPEC source said. "But it should be done in a collective coordinated way and that can only happen when you start to be able to assess what would be the impact."
OPEC and non-OPEC meet next in June and they are widely expected to keep supply curbs in place until the end of 2018.
But a drop in Iranian exports due to US sanctions, plus supply disruptions in other OPEC members, such as Venezuela, could reduce supply more than planned, leading to a potential price spike.
But the OPEC source said a rise in prices due to the market's worries about supply should not be the parameter for OPEC to adjust output.
The OPEC source said any decision in June to raise output "should be driven by a potential physical shortage or reduction in production from any oil supply source not only Iran."
"You only handle (output) when you have a semi-clear idea of what would be the potential impact. It is too early now to do that," the source said.
He also said Saudi Arabia did not expect any physical impact on the oil market from the US sanctions on Iran until the third or fourth quarter of this year.
OPEC's objective its still to reduce global oil inventories to an acceptable level and any adjustment in production targets should be done in a coordinated way, the OPEC source said.
"This way you do not disrupt a mechanism that we have worked hard to put together and to sustain, just to address a short-term issue," the source said.
First Published: IST